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Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio.

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Speaker 2: So today we're announcing a federal lawsuit against Meta. Met

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Speaker 2: of course, is the parent company of Instagram and Facebook,

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Speaker 2: for knowingly harming the mental health of young social media users.

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Speaker 1: Meta Platforms is being sued by forty one states who

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Speaker 1: claimed that social media platforms Instagram and Facebook exploit young

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Speaker 1: people for profit by building an addictive features that are

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Speaker 1: harming their mental health. At a press conference of the

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Speaker 1: Attorney General of Washington State, Bob Ferguson, two teenagers described

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Speaker 1: their struggles coping with social media sites like Instagram.

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Speaker 3: The worst part was these pictures and videos were never ending.

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Speaker 3: The addictive algorithm and the constant flood of new content

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Speaker 3: kept me glued to my phone, and before I knew it,

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Speaker 3: I began to hate myself and.

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Speaker 4: The way I looked.

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Speaker 3: This all happened before I.

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Speaker 4: Turned thirteen, as I would go on my phone intending

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Speaker 4: to do other things and then instinctively start opening up Instagram,

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Speaker 4: opening up different social media platforms without even meaning to,

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Speaker 4: and then getting stuck in the cycle of scrolling seeing

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Speaker 4: other people's lives and interactions.

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Speaker 1: Ferguson said, Meta knowingly misled users and hooked youngsters with

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Speaker 1: psychologically manipulative product features.

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Speaker 2: They tap into their so called fear of missing out,

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Speaker 2: discouraging them from leaving the apps once they are logged on.

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Speaker 2: Meta is aware of the addictive nature of these features

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Speaker 2: for young people and the risks that they pose. The

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Speaker 2: original developer of the infinite scroll concept Liken the feature too,

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Speaker 2: and I'm quoting now behavioral cocaine.

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Speaker 1: Thirty three states are filing a joint lawsuit in federal

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Speaker 1: court in California, while attorneys general for d and eight

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Speaker 1: other states are filing separate complaints in federal, state or

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Speaker 1: local courts. Joining me is Bloomberg Intelligence analyst Matthew Shettenhelm.

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Speaker 1: Matt tell us about the federal lawsuit.

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Speaker 5: So yesterday over thirty states filed in federal court in California,

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Speaker 5: basically using their consumer protection laws under each states and

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Speaker 5: accompanying that with one claim under federal law under the

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Speaker 5: Children Online Privacy Protection Act, which is known as KAPPA.

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Speaker 5: And basically the allegation here is that Meta acted in

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Speaker 5: an unfair and deceptive manner because it knew that its

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Speaker 5: social media service was harmful to teens, but it withheld

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Speaker 5: that knowledge and misled users and proceeded to deliver its

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Speaker 5: product to teens anyway. So it's seeking damages, civil penalties

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Speaker 5: as well as injunctive relief, basically forcing the company to

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Speaker 5: change how it serves teams. That's the goal of the lawsuit.

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Speaker 1: And so what they're alleging is that Meta designed algorithms.

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Speaker 1: It says Meta did not disclose that its algorithms were

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Speaker 1: designed to capitalize on young users, dopamine responses, and create

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Speaker 1: an addictive cycle of engagement. So the allegation is that

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Speaker 1: Meta specifically designed an algorithm for this.

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Speaker 5: That's exactly right. So the lawsuit takes aim at a

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Speaker 5: number of features that are sort of fundamental to how

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Speaker 5: Meta designed its social media platforms, using data about the

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Speaker 5: teams to send them content that keeps them scrolling and

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Speaker 5: keeps them reading, sending them notifications that keep them coming

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Speaker 5: back to the service as soon as they look away

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Speaker 5: from it, using the law like system that entices them

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Speaker 5: and draws them in and pushes them to put more

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Speaker 5: content out there. And the allegation here is that Meta

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Speaker 5: knew that all of these features were harmful to teams.

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Speaker 5: There's a separate lawsuit actually in this same federal court

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Speaker 5: that goes to the design of the product itself and

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Speaker 5: whether that violates product liability law or whether Facebook was

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Speaker 5: negligent in designing it. Actually, this Friday, that's going to

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Speaker 5: be go for emotion to dismiss hearing. This suit's a

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Speaker 5: little bit different. It's not about the design itself. It's

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Speaker 5: about did Meta lie? Did it mislead users about that?

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Speaker 5: And so it takes same It uses these existing consumer

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Speaker 5: protection laws about what is unfair and what is deceptive

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Speaker 5: to ask did Facebook mislead the public about what it knew?

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Speaker 1: And a lot of this is based on the whistleblower

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Speaker 1: who released internal Dyes documents in twenty twenty one.

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Speaker 5: Yeah, I think that's the real start of this, when

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Speaker 5: Francis Hoggin came out with her release of the internal

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Speaker 5: documents suggesting that that Facebook knew more about the risk

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Speaker 5: to children than it was letting on. And so this

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Speaker 5: is really you been playing out ever since that moment. Now,

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Speaker 5: Facebook disputes her allegations and says that they're overblown and

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Speaker 5: that the evidence isn't clearly as one sided as it

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Speaker 5: might seem or as she might suggest. So that's the

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Speaker 5: sort of allegation that would be tested in this case

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Speaker 5: if it gets past a motion to dismiss.

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Speaker 1: Metta said, we share the Attorney General's commitment to providing

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Speaker 1: teens with safe, positive experiences online and have already introduced

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Speaker 1: over thirty tools to support teens and their families. Do

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Speaker 1: you know what kind of tools they're talking about.

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Speaker 5: I think these are features like there are settings that

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Speaker 5: teens can put on the product to turn off after

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Speaker 5: so many minutes on the product. I think there are

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Speaker 5: a handful of features like that that they have added.

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Speaker 5: You can turn off if you go into the settings,

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Speaker 5: you can turn off the data that is used about

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Speaker 5: you for ads. I think as a practical matter, these

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Speaker 5: features may not be used all that frequently. I know

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Speaker 5: my teenager doesn't jump to find those features, and I

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Speaker 5: suspect that's true of many many other teams as well.

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Speaker 5: So I think the negotiation here before this lawsuit was filed,

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Speaker 5: was trying to push the states, likely trying to push

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Speaker 5: Meta to find more features and more effective features. And

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Speaker 5: I think eventually, if you saw this lawsuit settle, you

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Speaker 5: might see a push for even more in that direction,

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Speaker 5: more effective features to discourage the use of the network

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Speaker 5: so frequently by young users.

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Speaker 1: Would they have to actually change the algorithm? Would Meta

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Speaker 1: have to change its algorithm?

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Speaker 5: That's the question. It starts to become maybe a difficult

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Speaker 5: solution because, as we've talked about, this is really focused

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Speaker 5: on young users. And is there even a way for

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Speaker 5: the company to tailor a fix that changes the algorithm

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Speaker 5: just for teens. I don't know. That's probably part of

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Speaker 5: the conversation, and it has a technical component that probably

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Speaker 5: makes it tricky as well.

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Speaker 1: Yeah, because I was listening at the press conference by

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Speaker 1: the Washington a G he had two teenagers talk about this,

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Speaker 1: and they were so self aware of what was happening,

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Speaker 1: and yet they still couldn't get away from it. Listen

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Speaker 1: to the things that one of the teenagers tried.

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Speaker 4: I've done a lot of different methods to try to

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Speaker 4: prevent engagement with Instagram. I've created time limits, I've created

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Speaker 4: like an app that you have to open first to

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Speaker 4: breathe and then to engage with Instagram. But all of

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Speaker 4: these methods eventually fail because I understand that it's up

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Speaker 4: to my own discretion and the promise of gaining connection

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Speaker 4: with my peers owas seems to be more important.

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Speaker 5: Yeah, I mean, I think that's the allegation that it's

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Speaker 5: so inviting and so difficult for young users to look away,

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Speaker 5: that the companies need to make changes here. Now, it's

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Speaker 5: sort of a tricky First Amendment problem here. I mean,

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Speaker 5: in the media, there's always been allegations about, you know,

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Speaker 5: the next form of media and the harm that it's

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Speaker 5: causing to you. So you can go back to the

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Speaker 5: nineteen seventies and the Federal Trade Commission was going to

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Speaker 5: go after advertising to kids that made them eat onhealthy things,

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Speaker 5: and there was a big to do over that, and

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Speaker 5: ultimately that sort of fizzled as well. And so you wonder,

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Speaker 5: especially in light of the serious First Amendment arguments that

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Speaker 5: Meta is going to make to say, look, we have

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Speaker 5: the right to organize speech on our platform and to

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Speaker 5: make it enticing, to make it, you know, so useful

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Speaker 5: and engaging for our users. That's sort of a fundamental

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Speaker 5: First Amendment right. What they can't do is mislead about it.

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Speaker 5: So that's what if we get right back down to

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Speaker 5: the key legal element here is did they mislead? Did

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Speaker 5: they know something and then tell the world the opposite.

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Speaker 1: Coming up next on the Bloomberg Law Show, I'll continue

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Speaker 1: this conversation with Bloomberg Intelligence analyst Matthew Shettenhelm, and we'll

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Speaker 1: talk about emotion for summary judgment that's coming up this week.

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Speaker 1: In some other lawsuits against social media platforms, I'm June

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Speaker 1: Grosso and this is Bloomberg. The Attorney General for Washington State,

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Speaker 1: Bob Ferguson, is one of the forty one state ags

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Speaker 1: suing Meta platforms, claiming Instagram and Facebook exploit young people

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Speaker 1: for profit by building an addictive features that are harming

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Speaker 1: their mental health.

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Speaker 2: Not only did Meta know the risks these features posed

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Speaker 2: to children and teens, the company's own research demonstrate the

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Speaker 2: potential for psychological and physical.

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Speaker 1: I've been talking to Bloomberg Intelligence analyst Matthew Shettenhelm, and

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Speaker 1: our children or teenagers particularly attractive demographic for businesses and advertisers.

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Speaker 5: Yeah, I think it's it's important for the company to

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Speaker 5: facilitate engagement in young users because young users look at

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Speaker 5: they are important a source for advertisers to go after,

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Speaker 5: and young users grow up to be older users, and

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Speaker 5: so that the more you can engage them at a

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Speaker 5: young age, that only makes them, you know, use the

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Speaker 5: product more in later years. So I do think it's

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Speaker 5: an important demographic now. Metas pushed back on that a

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Speaker 5: little bit and said, it really maybe isn't a large

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Speaker 5: goal to keep youthful users on the service for you know,

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Speaker 5: extended amounts of times. I think that's going to be

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Speaker 5: an issue in this case is how much has Meta

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Speaker 5: said that that is or is not a goal to

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Speaker 5: keep young users spending time the platform.

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Speaker 1: The suit also accuses Meta of violating the Children's Online

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Speaker 1: Privacy Protection.

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Speaker 5: Act right so that you know, I almost read it

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Speaker 5: like a throw in. They kind of throw that in

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Speaker 5: at the back of the suit maybe to get this

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Speaker 5: into federal courts, because all these other things are state

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Speaker 5: law claims that you would think maybe would be brought

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Speaker 5: state by state in their own courts. By having a

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Speaker 5: federal claim in there, then you say, all these other

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Speaker 5: state claims are sort of supplemental to it, and so

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Speaker 5: one federal court should take the whole thing at one time.

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Speaker 5: But the federal claim focuses on the idea that for

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Speaker 5: the youngest users, those under thirteen, this federal law says

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Speaker 5: you have to have the parents make the decision about

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Speaker 5: whether the kids' data can be used for ad targeting

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Speaker 5: and have to get their consent and the allegation here

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Speaker 5: is that Facebook knew that some of these users were

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Speaker 5: under thirteen years old, and it nevertheless let them use

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Speaker 5: the system without getting proper parental approval.

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Speaker 1: My daughter is well paid the teenage years. So let

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Speaker 1: me ask you this. When there are these rules that

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Speaker 1: you have to get parental permission, how is that implemented

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Speaker 1: when you're online.

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Speaker 5: I mean, it's a problem with this law too in

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Speaker 5: one other sense as well, that it only applies. Facebook

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Speaker 5: only is vulnerable to the law if it knows it

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Speaker 5: knowingly allows users under thirteen to go on the site.

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Speaker 5: And so that's the first problem that a lot of

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Speaker 5: times kids are going on and filling this in. And

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Speaker 5: as long as Facebook doesn't know that the kids are

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Speaker 5: going on below age thirteen without getting parental approval, then

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Speaker 5: it's at least theoretically protected from liability. But otherwise I

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Speaker 5: think there's sort of a notification process where once you

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Speaker 5: fill in that hey, I'm younger than thirteen years old,

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Speaker 5: then there's going to be pop up screens that require

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Speaker 5: a second level of approvals and sign off from a parent.

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Speaker 5: But if the kid misleads in that first answer to

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Speaker 5: the question, that's where it gets kind of tricky.

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Speaker 1: When I first heard about this lawsuit, I thought, well,

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Speaker 1: there have been other lawsuits like this, right, I keep

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Speaker 1: hearing about lawsuits against platforms. What happens to them?

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Speaker 5: Yeah, So this is just one piece of a much

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Speaker 5: larger sort of legal puzzle I think here on exactly

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Speaker 5: this issue. So you know, as I said, there's this

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Speaker 5: other lawsuits that is going ahead Friday of this week

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Speaker 5: in the Northern District of California that says, look, social

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Speaker 5: media itself is a defective product and the companies are

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Speaker 5: negligent just by putting it out there exactly for these

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Speaker 5: features we talked about, you know, in facilitating engagement of

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Speaker 5: youth and the harm it and inflicts on you know,

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Speaker 5: mental health for youth across the country. Is that itself

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Speaker 5: defective And so that suit's going to play out. As

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Speaker 5: we've talked about before, there's this liability shield Section two

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Speaker 5: thirty liability shield. Usually Facebook didn't face lawsuit for bad

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Speaker 5: stuff on its system because of the liability shield. Increasingly

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Speaker 5: courts are reading that real narrowly and so these cases

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Speaker 5: can move ahead in a way that they hadn't before.

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Speaker 5: The Federal Trade Commission is going after Meta on its

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Speaker 5: targeting of youth. So it's really it's a storm here

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Speaker 5: on multiple levels. And the real elephant in the room

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Speaker 5: is what's Congress going to do about it. Congress hasn't

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Speaker 5: been able to pass a law restricting the use of

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Speaker 5: data from kids or advertising to kids, and so the

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Speaker 5: real question is is Congress going to be able to

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Speaker 5: step in with something here? In the meantime, this is

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Speaker 5: an effort to use existing old law to try to

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Speaker 5: go after these companies, and that's often not easy. So

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Speaker 5: I think the companies can win these cases, fight this

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Speaker 5: stuff off, although I mean it's not easy. It can

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Speaker 5: be difficult. In a lot of cases.

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Speaker 1: It seems like meta it's part of the cost of

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Speaker 1: doing business. It's been fighting with the Federal Trade Commission for.

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Speaker 5: How long exactly right. It did a five million dollars

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Speaker 5: settlement on its data issues is part of the Cambridge

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Speaker 5: Analytica matter, and that hasn't been the end of the story.

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Speaker 5: Now under Lena Khan, the Federal Trade Commission is trying

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Speaker 5: to reopen that settlement and ban exactly what we're talking

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Speaker 5: about here, the use of data to advertise to kids.

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Speaker 5: There was a court hearing I went to in Washington,

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Speaker 5: I think just last week on exactly that question, can

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Speaker 5: the FTC ban that just by reopening the twenty twenty settlement.

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Speaker 5: So this is part of life for a company like

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Speaker 5: Meta these days. And these are lawsuits that are difficult,

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Speaker 5: but there are lawsuits that you know, you're applying old

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Speaker 5: law to new technology, and their lawsuits that often I

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Speaker 5: think the companies can win, but it's not always going

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Speaker 5: to be easy.

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Speaker 1: You know, I'm surprised that Congress hasn't been well. I'm

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Speaker 1: not surprised surprised that Congress hasn't been able to do

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Speaker 1: something about, you know, the young users, because you know,

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Speaker 1: with this lawsuit, you have bipartisan attorneys general from blue

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Speaker 1: states and red states and purple states joining together to

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Speaker 1: sue Meta. So it's surprising that Congress can't get together.

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Speaker 5: That's a great point. And there is a law piece

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Speaker 5: of legislation that has advanced in Congress known as the

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Speaker 5: Kids Online Safety Act, and it has over forty co

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Speaker 5: sponsors in the Senate. Right now, it's just so difficult

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Speaker 5: for Congress to agree on anything. I mean, right now

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Speaker 5: they're struggling just to agree on who their leaders will be.

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Speaker 5: And you know, all of these proposed laws have just

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Speaker 5: struggled to advance very far. But you're exactly right. This

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Speaker 5: has bipartisan support, and as I said that Kids Online

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Speaker 5: Safety Act, you know, it probably has a better chance

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Speaker 5: than most pieces of legislation. So you could see some

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Speaker 5: movement there if Congress can get attacked together.

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Speaker 1: Also, I mean TikTok I always thought was the most

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Speaker 1: addictive of these platforms for.

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Speaker 5: Kids, right right, I think that's that's right, and it's

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Speaker 5: very popular with the kids. Some of the lawsuits have

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Speaker 5: targeted TikTok as well, as I said that the one

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Speaker 5: that's pending in the Northern District of California that will

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Speaker 5: be heard on Friday, that targets TikTok as well as Meta,

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Speaker 5: as well as a couple of the other social media networks.

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Speaker 5: This new one doesn't target TikTok, but we could see

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Speaker 5: follow on actions from the states I think going after

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Speaker 5: TikTok as well.

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Speaker 1: Well, we'll have to check back with you to find

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Speaker 1: out what happens on Friday at that hearing. Thanks so much, Matt.

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Speaker 1: That's Matthew Shechttenhelm, Bloomberg intelligence analyst. Coming up next on

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Speaker 1: The Bloomberg Law Show. Instagram promoters test the limits of

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Speaker 1: a ninety year old securities law. This is Bloomberg.

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Speaker 6: Welcome back to real estate investing made simple. Grant Cardone

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Speaker 6: here in the car Doon Zone. Every Monday, I said, Steve,

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Speaker 6: what I hey you?

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Speaker 3: Last month?

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Speaker 6: Steve was paid thirty one twenty dollars last month because

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Speaker 6: the invested at Cardoncapital dot Com, Cardoncapital dot Com, Cardoncapital

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Speaker 6: dot Com.

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Speaker 1: This month, the Supreme Court declined to hear a case

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Speaker 1: involving a lawsuit against real estate management company cardone Capital

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Speaker 1: and its CEO, Grant Cardone, for misleading statements in YouTube

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Speaker 1: and Instagram videos. The lawsuit was dismissed on other grounds

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Speaker 1: days after the justices refused the case, But the core

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Speaker 1: issue remains, what does it mean to sell securities in

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Speaker 1: the age of YouTube and Instagram? As venture capital firms

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Speaker 1: and others hyping investment projects online are facing lawsuits from

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Speaker 1: disgruntled buyers. Joining me is Anne Lipton, a business law

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Speaker 1: professor at Tulane University. Start with the real basics, which

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Speaker 1: is tell us about the provision in the thirty three

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Speaker 1: Securities Act that allows sellers to sue over unregistered securities.

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Speaker 7: Okay, so Section twelve is from the nineteen thirty three

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Speaker 7: Securities Act, and it basically has two separate provisions. The

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Speaker 7: first is that a purchaser of a security that was

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Speaker 7: sold unregistered when it should have been registered has a

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Speaker 7: right to sue the seller. Basically, it's a right of recision.

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Speaker 7: They can give the security back and ask for their

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Speaker 7: money back minus any income they've earned on it, so

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Speaker 7: they can sue whoever sold it to them if it

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Speaker 7: was sold in violation of the registration provisions. And then secondly,

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Speaker 7: they can sue anyone who sold it to them or

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Speaker 7: who solicited the purchase if the prospectus or sales documents

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Speaker 7: contained false statements. Now, sometimes there's a bit of a

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Speaker 7: debate about what counts as a prospectus, but what it

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Speaker 7: comes down to is that this is sometimes a more

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Speaker 7: attractive option than say, more traditional ways of suing for

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Speaker 7: false statements, like Section ten B, which is the anti

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Speaker 7: fraud statute, because if you sue for false statements in

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Speaker 7: connection with essentially these unregistered ccurity sales under section twelve,

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Speaker 7: you don't have to a show that you relied on

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Speaker 7: the false statement, and you don't have to show that

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Speaker 7: there was any intent to make a false statement, and so.

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Speaker 1: How did the Supreme Court define a seller in nineteen eighty.

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Speaker 7: Eight, So in the case of Pitter versus Doll, there

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Speaker 7: was a question of who counts as a statutory seller.

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Speaker 7: In other words, Section twelve speaks of people who sell securities.

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Speaker 7: So the question was, do you have to be actually

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Speaker 7: the person who transfer the title me to you or

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Speaker 7: could it be other people who are somewhat involved with

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Speaker 7: the sale. And the court first said it has to

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Speaker 7: be either a direct transfer of title or it has

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Speaker 7: to be someone who solicited the purchase. But they drew

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Speaker 7: a distinction between someone who is somehow involved and had

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Speaker 7: something to do with the buyer actively going out and

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Speaker 7: purchasing the security, and instead they said they have to

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Speaker 7: have actually solicited and had some kind of relationship with

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Speaker 7: the buyer. They rejected a test that would be somehow

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Speaker 7: like people who are just substantially participate in the sale.

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Speaker 7: So that was interpreted by courts to mean that you

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Speaker 7: could only be liable under section twelve if you literally

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Speaker 7: transferred title it was your security and you sold it

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Speaker 7: to someone else, or if you had some kind of

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Speaker 7: direct contact with a relationship with the buyer so that

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Speaker 7: you induced the purchase that way.

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Speaker 1: So in our world of social media, where venture capital

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Speaker 1: firms and others are hyping investment projects online, are courts

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Speaker 1: having a difficult time determining whether they're sellers or not.

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Speaker 7: Yeah. So the issue here is that after Pinter versus Doll,

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Speaker 7: there were a bunch of cases involving what were basically

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Speaker 7: registered offerings. They were registered offerings, they were IPOs where

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Speaker 7: people sued for false statements in the IPO documents. Now

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Speaker 7: there's a cause of action specifically for that false statements

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Speaker 7: in a registration statement under section eleven, and they would

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Speaker 7: also sue under section twelve because Section twelve has liability

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Speaker 7: both for unregistered offerings, which these weren't, or for false

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Speaker 7: statements and a perspective, and courts rejected the Section twelve

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Speaker 7: liability looking at Pinter in a lot of cases where

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Speaker 7: there was no direct contact with the buyer. So for example,

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Speaker 7: issuing companies, it was their security, but they sold in

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Speaker 7: a firm commitment underwriting, meaning the underwriters bought the securities

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Speaker 7: from the issuer. The underwriters then sold to the public.

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Speaker 7: The producer would try to sue the issuer under section

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Speaker 7: twelve because the issuer's name is all over the perspectives.

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Speaker 7: It's like their company, it's their securities being sold, and

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Speaker 7: the courts would say the issuer did not have enough

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Speaker 7: direct involvement with this particular sale to this buyer to

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Speaker 7: justify imposing Section twelve viability. Now, you could still have

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Speaker 7: other forms of liability because these were registered offerings, but

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Speaker 7: you couldn't have liability under section twelve. So the court

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Speaker 7: reading pincher vicious now very narrowly to mean you have

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Speaker 7: to have had some kind of contact with a relationship

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Speaker 7: with the buyer. So now we fast forward to crypto,

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Speaker 7: and the problem is there is an alternative scheme because crypto,

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Speaker 7: assuming it's a security, which is a whole everything, but

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Speaker 7: let's assume is a security. If crypto is a security,

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Speaker 7: it's not registered. So the liability regime that was available

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Speaker 7: in those IPO cases for registered offerings is not available

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Speaker 7: to these shareholders. So for these shareholders, Section twelve is

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Speaker 7: sort of the main potential avenue of liability other than

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Speaker 7: the anti fraud laws, which are hard. There's much harder.

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Speaker 7: So they're suing under section twelve because that's it. And

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Speaker 7: what we've seen now is too Appellate Court said, direct contact,

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Speaker 7: we never said that. We are you talking about known

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Speaker 7: as it's talent is a solicitation. As long as you

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Speaker 7: make these public statements in advertising urging people to buy,

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Speaker 7: that's a solicitation, even if there's no personal relationship. Meanwhile,

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Speaker 7: there are at least a couple of other decisions that say, no,

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Speaker 7: we're sticking to the old interpretations of pinter that there

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Speaker 7: have to be this kind of direct relationship. And then

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Speaker 7: you have courts that are sort of like saying, like

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Speaker 7: in a case against Coinbase, that Coinbase with air drops

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Speaker 7: and materials about particular securities, that wasn't a solicitation. But

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Speaker 7: it's not exactly clear why, you know, the court just

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Speaker 7: says that's not enough. So we don't know exactly what's

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Speaker 7: enough or what exactly the regime is going to be.

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Speaker 1: The Supreme Court decided not to take a case involving

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Speaker 1: cardone Capital. Tell us a little about the issues there, Well,

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Speaker 1: that was the.

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Speaker 7: Case that was Actually it wasn't a registered offering. I

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Speaker 7: believe it was under Regulation A. So Regulation A is

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Speaker 7: an exemption from a full on registered offerings, but it

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Speaker 7: does require some degree of filing and disclosure. With the SEC,

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Speaker 7: so it wasn't an unregistered offering. But because it's not

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Speaker 7: registered offerings, the standard protections available in registered offerings are

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Speaker 7: not available to purchasers. Instead, the only liability available would be,

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Speaker 7: you know, just straight up fraud, which is again very

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Speaker 7: hard to prove, or Section twelve liability. That's what's available.

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Speaker 7: And so this real estate company, they use social media

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Speaker 7: to advertise the offering that was filed with the SEC.

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Speaker 7: They had documents with the SEC and so forth, and

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Speaker 7: shareholders claimed that these advertisements were solicitations. In the Ninth

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Speaker 7: Circuit agreed and repudiated. I mean, you know, some of

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Speaker 7: the case law that had held there must be direct

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Speaker 7: contact hadn't come out of the Ninth Circuit, so at

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Speaker 7: very least it was disagreeing with you know, the other

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Speaker 7: courts that had imposed something like a direct contact requirement.

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Speaker 7: But the Supreme Court denied sort you know, I mean,

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Speaker 7: there are any number of reasons why they could have

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Speaker 7: denied CIRT. But one possibility is that the social media

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Speaker 7: cases are new. They're you know, looking to this old

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Speaker 7: precedent that was generated under IPO situations, and you know,

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Speaker 7: it may take some time to work through the court

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Speaker 7: you know, if you ask.

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Speaker 1: An average person, it doesn't seem like the difficult question.

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Speaker 1: They're online, they're soliciting. Yeah, they're selling. What makes you difficult?

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Speaker 7: Well, because the interesting thing is that the word solicit

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00:25:56,680 --> 00:25:59,320
Speaker 7: it doesn't actually appear in the statute. Nothing in the

439
00:25:59,320 --> 00:26:04,000
Speaker 7: statutes as imposing liability for solicitation. What the statute says

440
00:26:04,119 --> 00:26:08,520
Speaker 7: is imposing liability for selling. The Supreme Court's interpretation of

441
00:26:08,560 --> 00:26:11,280
Speaker 7: selling in Printer versus Doll, this case from nineteen eighty

442
00:26:11,320 --> 00:26:14,960
Speaker 7: eight is the one that imposed this concept of solicitation

443
00:26:15,440 --> 00:26:18,440
Speaker 7: with this very specific kind of definition. And to be honest,

444
00:26:18,440 --> 00:26:21,600
Speaker 7: Printer doesn't seem to really understand how security sales work.

445
00:26:22,320 --> 00:26:24,879
Speaker 7: There are parts of it that display a kind of

446
00:26:24,960 --> 00:26:28,119
Speaker 7: lack of understanding. For instance, there's a line in it

447
00:26:28,160 --> 00:26:31,159
Speaker 7: that says you can't have liability for a seller seller

448
00:26:31,200 --> 00:26:33,800
Speaker 7: that if you sell to somebody and that person sells

449
00:26:33,840 --> 00:26:36,760
Speaker 7: to someone else, the original seller isn't going to be liable.

450
00:26:36,800 --> 00:26:39,480
Speaker 7: But that's a firm commitment underwriting, and courts are struggling

451
00:26:39,520 --> 00:26:41,239
Speaker 7: with that. The sec has been struggling with that ever

452
00:26:41,240 --> 00:26:43,840
Speaker 7: since Pinter versus Doll held it. So, you know, this

453
00:26:44,160 --> 00:26:47,560
Speaker 7: concept of solicitation and exactly how we're defining it is

454
00:26:47,560 --> 00:26:49,800
Speaker 7: not in the statute. It comes from the Supreme Court

455
00:26:49,880 --> 00:26:51,439
Speaker 7: case launch. So now we're all trying to figure out

456
00:26:51,480 --> 00:26:53,639
Speaker 7: what the Supreme Court meant and how you translate a

457
00:26:53,720 --> 00:26:55,679
Speaker 7: case in nineteen eighty eight to today.

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00:26:56,320 --> 00:26:59,439
Speaker 1: So the Ninth and the Eleventh Circuits are they in

459
00:26:59,560 --> 00:27:00,560
Speaker 1: sync ruling?

460
00:27:01,240 --> 00:27:03,879
Speaker 7: Yeah, it's they seem to be following the same path

461
00:27:03,920 --> 00:27:05,640
Speaker 7: that you know, at least, at the very least, these

462
00:27:05,640 --> 00:27:09,440
Speaker 7: sort of widespread social media campaigns are sufficient. But what's

463
00:27:09,520 --> 00:27:11,800
Speaker 7: really unclear is like what would be like, I mean, like,

464
00:27:11,840 --> 00:27:14,800
Speaker 7: once you take away the requirement of direct contact, which

465
00:27:14,840 --> 00:27:17,720
Speaker 7: is how courts seem to be reading it before, then

466
00:27:17,760 --> 00:27:20,520
Speaker 7: there's the question of well, how much urging is enough?

467
00:27:21,280 --> 00:27:24,239
Speaker 7: And that was exactly what happened with coinbase, where you know,

468
00:27:24,359 --> 00:27:27,040
Speaker 7: Coinbase technically it did have direct contact. It was talking

469
00:27:27,040 --> 00:27:29,359
Speaker 7: to its customers and it you know, it does whatever

470
00:27:29,359 --> 00:27:31,119
Speaker 7: it does to say, you know, here's an airdrop of

471
00:27:31,119 --> 00:27:32,920
Speaker 7: a new security or whatever, and a court said, well,

472
00:27:32,920 --> 00:27:35,240
Speaker 7: that's just not enough. So now we have all kinds

473
00:27:35,240 --> 00:27:37,840
Speaker 7: of questions like if social media is permissible, if you

474
00:27:37,880 --> 00:27:41,639
Speaker 7: don't have the restriction of direct contact, then how much

475
00:27:41,800 --> 00:27:46,000
Speaker 7: urging is enough to qualify solicitation, given that in Pinter,

476
00:27:46,160 --> 00:27:50,119
Speaker 7: the Supreme Court's concern was, we don't want just substantial

477
00:27:50,160 --> 00:27:52,520
Speaker 7: participation to be enough. And the reason we don't was

478
00:27:52,520 --> 00:27:54,600
Speaker 7: because we want people to have certainty as to when

479
00:27:54,640 --> 00:27:56,960
Speaker 7: they are potentially liable or not. It's important that we

480
00:27:56,960 --> 00:27:59,680
Speaker 7: have certainty. Direct contact at least, that's that's a rule

481
00:28:00,119 --> 00:28:01,560
Speaker 7: be the best rule. It may not be the most

482
00:28:01,560 --> 00:28:04,000
Speaker 7: functional rule, but we know what it means. We know

483
00:28:04,080 --> 00:28:07,040
Speaker 7: when we see in. Now we're in this space where

484
00:28:07,080 --> 00:28:09,280
Speaker 7: it's not clear what's going to be enough and.

485
00:28:09,280 --> 00:28:12,480
Speaker 1: Which circuits have a different take on this than the

486
00:28:12,600 --> 00:28:13,600
Speaker 1: ninth and the eleventh.

487
00:28:14,320 --> 00:28:17,359
Speaker 7: There are several circuits that implied anyway, especially in these

488
00:28:17,359 --> 00:28:20,040
Speaker 7: IPO cases, that you needed something like direct contact. The

489
00:28:20,080 --> 00:28:23,840
Speaker 7: third circuit, the first circuit, the fifth circuit. I know,

490
00:28:23,880 --> 00:28:28,600
Speaker 7: there's definitely a district Core case involving crypto that followed

491
00:28:28,920 --> 00:28:31,560
Speaker 7: in the second circuit that followed these cases to say no,

492
00:28:31,680 --> 00:28:35,000
Speaker 7: you need something like direct contact, although sometimes the phrasing

493
00:28:35,000 --> 00:28:37,280
Speaker 7: they use is sort of unclear because they say direct

494
00:28:37,359 --> 00:28:40,120
Speaker 7: contact or active solicitation, and it's not exactly clear what

495
00:28:40,160 --> 00:28:41,000
Speaker 7: they mean by active.

496
00:28:41,880 --> 00:28:46,719
Speaker 1: Why don't these quote sellers want to register just to

497
00:28:46,720 --> 00:28:47,520
Speaker 1: be safe.

498
00:28:47,840 --> 00:28:49,440
Speaker 7: So first of all, the crypto people all say that

499
00:28:49,440 --> 00:28:51,760
Speaker 7: these aren't securities anyway. But the whole point is that

500
00:28:51,840 --> 00:28:56,800
Speaker 7: like registration, if you register them that there's a terrific

501
00:28:56,880 --> 00:29:00,120
Speaker 7: amount of disclosure you have to make and there's very

502
00:29:00,120 --> 00:29:03,680
Speaker 7: strict liability if those disclosures are false. That's why courts

503
00:29:03,680 --> 00:29:05,680
Speaker 7: could get away for so long saying well, we won't

504
00:29:05,680 --> 00:29:09,160
Speaker 7: have Section twelve liability for these IPO situations because there

505
00:29:09,160 --> 00:29:12,000
Speaker 7: were alternatives. There's some very strict liability for false statements.

506
00:29:12,000 --> 00:29:14,320
Speaker 7: If you register, you have to do a terrific amount

507
00:29:14,440 --> 00:29:18,280
Speaker 7: of disclosure. It's very expensive and you're risking this liability.

508
00:29:18,520 --> 00:29:22,400
Speaker 7: And a lot of crypto people say that the registration requirements,

509
00:29:22,440 --> 00:29:27,400
Speaker 7: like the disclosure requirements that attach, are simply not suitable

510
00:29:27,440 --> 00:29:29,560
Speaker 7: for crypto, like they ask for things that don't make

511
00:29:29,600 --> 00:29:32,719
Speaker 7: sense in the crypto context, like principles of an organization

512
00:29:32,800 --> 00:29:36,280
Speaker 7: when it's a decentralized autonomous organization, or addresses when there

513
00:29:36,320 --> 00:29:39,480
Speaker 7: is no address. So the crypto people will say that

514
00:29:39,640 --> 00:29:42,680
Speaker 7: not only is disclosure expensive and opens us up to

515
00:29:42,680 --> 00:29:46,760
Speaker 7: all this liability, but the SEC hasn't updated the registration

516
00:29:46,840 --> 00:29:49,120
Speaker 7: requirements to really make sense in a crypto world.

517
00:29:50,000 --> 00:29:52,360
Speaker 1: So then will it be up to the Supreme Court

518
00:29:52,560 --> 00:29:56,080
Speaker 1: to clarify this so that there is clearer guidance?

519
00:29:56,840 --> 00:29:58,880
Speaker 7: Very possibly. I mean, you know, there's a lot that

520
00:29:58,880 --> 00:30:01,240
Speaker 7: could happen in between. And then, I mean, first of all,

521
00:30:01,280 --> 00:30:04,360
Speaker 7: if all the circuits come to settle on something, I mean,

522
00:30:04,480 --> 00:30:07,000
Speaker 7: the Supreme Court doesn't have the kind of passion for

523
00:30:07,040 --> 00:30:11,600
Speaker 7: securities cases that say I do. So if the circuits

524
00:30:12,280 --> 00:30:16,640
Speaker 7: coalesce around a principle that's coherent, then the Supreme Court

525
00:30:16,680 --> 00:30:19,200
Speaker 7: may not step in at all. And you know, we

526
00:30:19,200 --> 00:30:21,360
Speaker 7: can all argue about it. But you know, I'm not

527
00:30:21,480 --> 00:30:24,600
Speaker 7: convinced that crypto is, you know, the wave of the future.

528
00:30:25,120 --> 00:30:28,200
Speaker 7: So at some point, if crypto has becomes less popular,

529
00:30:28,600 --> 00:30:31,440
Speaker 7: then we may just see less of these cases. I mean,

530
00:30:31,480 --> 00:30:35,640
Speaker 7: Regulation A was how this came up in the Ninth Circuit,

531
00:30:35,680 --> 00:30:37,680
Speaker 7: and that will still exist because that's sort of a

532
00:30:37,760 --> 00:30:40,560
Speaker 7: formal disclosure space for securities that you don't want to

533
00:30:40,560 --> 00:30:43,720
Speaker 7: do full registration for. But reggae isn't really that popular

534
00:30:43,760 --> 00:30:47,320
Speaker 7: to begin with. So I mean, if crypto becomes less

535
00:30:47,320 --> 00:30:50,719
Speaker 7: of a thing, it may simply be that this kind

536
00:30:50,760 --> 00:30:52,200
Speaker 7: of settles down by itself.

537
00:30:52,760 --> 00:30:54,959
Speaker 1: Well, it's been great to talk to you, Anne. I

538
00:30:55,040 --> 00:30:59,520
Speaker 1: love your enthusiasm about securities law. That's Anne Lipton, a

539
00:30:59,520 --> 00:31:03,480
Speaker 1: business professor at Tulane University. And that's it for this

540
00:31:03,640 --> 00:31:06,360
Speaker 1: edition of The Bloomberg Law Show. Remember you can always

541
00:31:06,360 --> 00:31:09,320
Speaker 1: get the latest legal news on our Bloomberg Law podcasts.

542
00:31:09,560 --> 00:31:12,600
Speaker 1: You can find them on Apple Podcasts, Spotify, and at

543
00:31:12,760 --> 00:31:17,800
Speaker 1: www dot Bloomberg dot com slash podcast Slash Law, And

544
00:31:17,880 --> 00:31:20,920
Speaker 1: remember to tune into The Bloomberg Law Show every weeknight

545
00:31:21,000 --> 00:31:24,480
Speaker 1: at ten pm Wall Street Time. I'm June Grosso and

546
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Speaker 1: you're listening to Bloomberg